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Things that haven’t happened since March 2020 will happen next week. The Federal Reserve will issue these cuts reference interest ratewhich has been stuck in the range between 5.25% and 5.50% for more than a year. This is the highest rate in more than two decades and borrowers who have applied for mortgages, personal loans and credit cards will have to pay more.
Home equity loans and home equity lines of credit (HELOCs)However, it has become a cheaper alternative for borrowers, especially since their homes are collateral in these situations. But the rising rate climate will affect homeowners who borrow money through it equityalso. Applicants considering this option should start researching now to be better prepared to act before rates are officially cut.
Start by looking at the home equity loan interest rates you qualify for today.
What home equity borrowers should consider before cutting their rates
The average home owner has approx $330,000 home equity now that can be used. But how much to borrow and how to do it depends on the borrower. With rates set to be cut, borrowers need to consider several factors.
Fixed rate or variable rate?
In the high-level climate in recent years, a fixed rate home equity loans made sense. By pursuing this option, borrowers know exactly what they will pay each month and they protect their finances from additional interest rate increases. But now that rates have cooled and some rate cuts are on the horizon, the variable rates that HELOCs offer may be more profitable.
A HELOC will adjust itself, often monthlywhen a home equity loan should refinanced to secure lower interest rates. However, today home equity loans are very popular lower interest rates (average 8.52% versus 9.99% for HELOC). So, you need to weigh the immediate savings with a home equity loan now against what you can get with a HELOC in the future (and don’t forget closing costs of home equity refinancingalso).
Compare home equity loans and HELOCs online today.
Is it worth waiting for rates to drop?
If you know what you need money for and can wait to withdraw the equity, then yes, it makes sense for the interest rate to fall – if you want a home equity loan. But if you don’t know exactly what you need the money for and prefer the flexibility of a revolving line of credit like a HELOC, then waiting for rates to drop will be pointless.
As mentioned, HELOC rates are self-adjusting so the savings that can be obtained through lower rates will automatically be realized with the HELOC. Deciding if you should wait for rates to drop, then, will depend on how you use the funds. And don’t forget that both types are eligible to deduct interest from your taxes if used for eligible purposes. So the higher rates are now deductible if you use the funds for eligible home repairs and renovations and can write off the interest. But if you wait for the lower rate until 2025, you won’t be able to use the deduction until you file your tax return again in 2025.
Bottom line
As with most financial products and services, timing is key. And with rate cuts just around the corner, home equity loans and HELOCs will be impacted. How much it affects you and how it affects your intended use will depend on your personal financial situation. So consider the benefits of a lower fixed rate home equity loan versus a higher rate HELOC that has the ability to change. By calculating this pros and cons with due diligence borrowers will be better able to determine if they really should wait for a rate cut or if they are better off acting now.
Have more questions? Learn more about the best home equity loan options here.
